Sam. It seems an innocent enough name… Type the phrase into the Google search engine and you’ll get a long list of people trying to boost their personal Internet profiles. You’ll even find a rather useful link that begins: “Sam is a person’s name, often a short form of Samuel or Samantha…” Of course if you’re part of the South African insurance industry then the acronym SAM takes on a whole new meaning. It stands for Solvency Assessment and Management, South Africa’s response to the EU-driven Solvency II regime.

On 13 April 2011 we attended a presentation by Paul Sauvé, Senior Vice President, Business Development at RGA International Reinsurance to learn more. And we were soon wondering how wise local regulators were to follow Europe into this regulatory quagmire. At the outset Sauvé reminded the audience that Solvency II was 11.5 years in the making in Europe. The regulation, when implemented on 1 January 2013, will impact more than 3 800 insurers across 30 European economies! “The fact that South Africa is implementing SAM across a single region is a huge bonus,” he said.

Legislation with a life of its own…

In an attempt to cut through the chaff, Sauvé singled out five key principles from the EU regulatory framework. First, Solvency two must protect policyholders and beneficiaries. Second, it must create a market-consistent evaluation of insurance company assets and liabilities. The third principle is to provide incentives for better measurement and management of risk. But the fourth principle is probably the most bizarre regulatory goal I’ve ever seen… It seems the regulators want to limit total failures (company collapses) to no more than one in every 200 cases… In other words, the regulator wants to ensure that no more than 19 of the 3 800 European insurers goes to the wall in the event of a future financial crisis. The fifth principle requires that all compliance responsibilities vest with the board of the insurer in question.

Solvency II is not just about capital adequacy… It is a European Union capital regime for insurers and reinsures that addresses all aspects of insurance industry regulation, incorporating dozens of old directives. Sauvé observes: “Solvency II is actually a complete stand-alone balance sheet system, unlike other systems where the capital requirement is calculated separately and then compared to actual capital on a separate balance sheet.” And it’s extremely complicated! We’re talking here about 400-pages of guidance just to get to the Solvency Capital Requirement (SCR) number for a particular insurer…

Taking Solvency II to South Africa?

Why SAM? Unfortunately the European regulatory framework will have a significant impact on insurance businesses in non-EU countries. We can think of two examples to show how Solvency II equivalency might impact local insurance business. Old Mutual, a London-listed company, will have to satisfy the regulators in its primary jurisdiction that its South African subsidiaries comply in some form with the Solvency II regime. Likewise PruProtect, a UK-based subsidiary of SA Listed Discovery Limited, will have to satisfy European regulators that its parent company – in South Africa – conforms to the basic tenets of the regulation.

Will the Financial Services Board (FSB) implement SAM in similar detail to European regulators? They’ll have to come close – after all their objective is to ensure that the regulation of the South African insurance sector remains in line with international markets. The big test will be whether local insurers are up to meeting the tight deadlines proposed in the recently published FSB SAM Roadmap. The FSB is talking about implementing SAM early in 2014. To this end they’ve scheduled three rounds of Quantitative Impact (QI) studies – a kind of back and forth between industry and regulator to ensure everything goes smoothly. (European regulators have just finished their fifth round and haven’t ironed out all the wrinkles yet!)

Small local insurers are within their rights to feel slightly nervous. Few of them have tackled a project implementation the size of SAM – and even fewer have the resources available to do the complex number crunching required. As Sauvé observes: “Even the largest European insurers have complained about the Solvency II calculations being too complex…”

Article provided by: FAnews